Chapter 4

Financial and
Economic Principles
Applied to Sport
Management
 Introduction
• The sport industry is a multibillion dollar
industry
• Financial aspects of sport industry shown in the
media can seem staggering to the average person
• Sport industry is definitely a major force in
North American business, though it is difficult to
get an accurate, reliable measure of its
magnitude
• Financial boom has created a great need for
people with training in finance
 Sales vs. Value-Added
• There is a difference between an industry’s sales
and its value-added
• Value-added is a more accurate statistic
• Cost of raw materials and manufacturing are
considered when calculating value-added
 Key Concepts: What Is Finance?
• No single, universally agreed upon definition
• Generally refers to two primary activities of an
organization:
1. How an organization generates the funds that flow
into that organization
2. How these funds are allocated and spent once
they are in the organization
 Key Concepts:
Revenues vs. Expenses
• Revenues
• Funds raised by an organization through a variety of
sources including tickets, merchandise, services, and
sponsorships
• Expenses
• Funds spent to operate an organization such as
salaries, equipment, utilities, food, travel, and
insurance
 Key Concepts: Profit
• Profit: More revenues than expenses
• Can be enhanced by increasing revenues, decreasing
costs, or both
• Income statement (statement of activity or profit and
loss): Summarizes an organization’s revenues,
expenses, and profits over a given time period
 Key Concepts: Assets
• Assets: Anything an organization owns that can be used
to generate future revenues (facility, equipment)
• Teams can fund or “finance” assets in many ways
• Owners’ equity: The amount of their own money
owners have invested in the firm
• Debt: Money an organization borrows (bonds)
• Franchise ownership groups
• Corporate conglomerates (see Table 4-1)
• Publicly traded sport companies (see Table 4-2)
 Key Concepts: Debt
• Define debt (*liability)
• The amount of money an organization borrows from
banks or other lenders in the market
• Organization is legally obligated to pay back the
original amount borrowed (principal) plus interest
• Bonds
• Financial instruments that allow the borrower to
both borrow large dollar amounts over an extended
period of time (20 or more years)
• Issued by government and/or corporate entities
• Often used to fund stadium construction
 Key Concepts: Credit Facilities
• Define credit
• Some professional leagues maintain “credit
facilities” (loan pools) backed by league revenues
• Individual teams can borrow from the loan pools at
better interest rates
• NFL debt has highest credit rating = lowest credit
risk = can borrow at lowest interest rate
 Key Concepts: Balance Sheet
• Balance sheet: A financial statement that summarizes
an organization’s assets, liabilities, and owner’s equity
at any given point in time
 Key Concepts:
Return on Investment (ROI)
• Define return on investment
• The expected dollar value return on each alternative
investment, stated as a percentage of the original
cost of each investment
• Example: ROI of 9% = the organization would
recover all of the initial investment plus an
additional 9%
• Note: There is “risk” associated with all investments
• Example: Professional sport franchise values
 Key Concepts: Risk
• Define risk
• Because the future is uncertain, the future benefits
of any investment cannot be known with certainty at
the time the investment is made
• Level of risk must be considered by sport managers
prior to any future investment
• Significant risk associated with how to fund
significant investments
• Equity vs. borrowed money?
 Key Concepts: Economics of Sports
(1 of 2)

• The general field of (micro) economics examines how

an industry organizes itself and how this industry
structure affects competition and profits among firms in
the industry
• Example: Spectator sport industry
• Teams compete on the field but cooperate financially off
the field; more like partners
• Mutual existence has positive financial impact on the other
(e.g., Sounders and Timbers)
 Key Concepts: Economics of Sports
(2 of 2)

• Sport leagues considered legal monopolies

• Face no direct competition from rival leagues
• Gives them greater bargaining power when dealing with
stakeholders (e.g., players, broadcasters, corporate sponsors,
and local governments) and allows them to potentially charge
higher prices
• Allows them to earn much higher profits than would
otherwise be the case, as well as enact financial policies (e.g.,
salary caps, revenue sharing) that would not be possible with
direct competition
 Key Skills
• No matter what type of sport organization involved, the
finance function is crucial
• Those interested in a career in sports should have solid
grounding in:
• Corporate finance
• Managerial and financial accounting
• Advanced use of spreadsheet software
• For those interested in working in spectator sports,
familiarity with sport economics is beneficial
 Current Issues:
Can Growth Continue?
(1 of 3)

• There has been an explosion of spending on recreational

and fitness activities
• The U.S. population has aged, overall affluence has
increased, and societal concerns about health-related
issues have grown
• For individual segments of non-spectator sport industry,
predicting trends is a factor; capital investments are
made now, payoff occurs later
• Spectator sport industry has had tremendous revenue
growth in the past 15 years as the result of gate receipts,
broadcast contracts, and new stadium revenues
 Current Issues:
Can Growth Continue?
(2 of 3)

• In professional sports, broadcast rights have increased

while fan avidity has dropped among millennials, and
cable companies have lost subscribers to cord-cutting
• In college athletics, broadcast rights are also increasing
• Concern: College athletics, taken as a whole, continues to
be unprofitable without external allocations
• Remember: Revenues – Expenses = Profit
• Revenues: Maybe there aren’t enough
• Expenses: Maybe increased costs for coaches’ salaries
and extravagant facilities are eroding potential profits
 Current Issues:
Can Growth Continue?
(3 of 3)

• Competitive balance
– Entertainment value connected to “uncertainty of
outcome”
– Differences in market sizes cause differences in
revenue potential, which cause differences in ability
to pay players, which cause differences in on-field
performance
– Salary cap, revenue sharing, luxury tax
 Summary
• The past two decades have been very financially
lucrative for many facets of the sport industry
• The financial “boom” has increased the need for
sport managers with specialized financial skills
• Analytical skills and tools will be needed by
sport managers of the future to help create new
revenue streams and solve financial problems
faced by sport organizations